Parents Advised to Keep College Funding Plans

College students aren’t the only ones pulling all-nighters. Many parents are also staying up late facing questions on how to manage investments and tuition costs during tough economic times.

The market has taken a toll on some Section 529 college-savings accounts that many parents have set up for their children. The plans, which take their name from a section of the U.S. tax code, allow families to set aside money for college. You put after-tax dollars into the 529, let the money grow and then take it out when it’s time to pay for college. The best part is if you take the money out to pay for qualified college costs, the withdrawal is tax free.

Family financial situations may differ depending on which 529 plan they have. The two most popular in Illinois are the Bright Start and College Illinois programs. Annual enrollment for the latter begins today.

Bright Start, similar to a 401K retirement plan, is tied to the stock market while the College Illinois plan, more like an insurance policy, is not.

Parents that have the state-sponsored Bright Start 529 program may see their earnings dive with the market and may be hesitant about using the funds when they’re worth less.

Mary Lewis, like many parents with children headed to college next year, worries about the havoc the stock market has on her college savings.

Lewis, who works for a software company, and her husband, Ron, have four children. They feel good about their savings for their oldest son, Dale, a senior at Elmhurst’s York High School who’s headed to college in the fall. The couple had utilized the prepay College Illinois plan for him.

“He’s set. He’s the first one out of the gate,” Mary said.

They’re thankful the money for his education is not tied to the stock market. “If his money was sitting in a 529 Bright Start account, I’d be really, really worried,” Mary said.

Her daughter, a freshman in high school, does have money in this type of account, however. Mary hopes the market will rebound by the time she needs the funds.

Several area financial planners suggest if parents with Bright Start accounts have an alternative way to pay upcoming tuition bills, they may want to leave the 529 plan alone until the stock market bounces back. Parents can save the money invested in Bright Start for a younger sibling or for a freshman’s final couple years of college. An option would be to pay the upcoming college fees with a home-equity loan or another source of savings.

However, if your youngest child is nearing the end of college, you may have to use up the 529 funds or face a penalty if the money is not used for education.

“What do you do? You don’t have the option to be aggressive. You have to pay tuition,” said Mark LaSpisa, co-founder of Vermillion Financial Advisors in South Barrington.

“Sometimes you just have to suck it up and deal with the ramifications,” he said.

Some parents are looking at other options. More students than ever are considering two-year colleges as a way to save money and take care of the core classes, said Cynthia Sullivan, owner of the College Advisor, a private company that provides counseling and other services for students, in St. Charles.

She has also noticed an increase in top students choosing schools based on the scholarship dollars they are able to obtain.

“Parents have to look at all sources and funding options and choose to withdraw from what’s most advantageous,” said Pat Doland, president of Reason Financial Advisors in Northbrook.

He added that the Bright Start plan provides security in that it develops based on the child’s age. Similar to target-date funds in retirement accounts, these portfolios shift from aggressive to conservative as the child approaches college age.

College costs continue to grow. Tuition for the University of Illinois is about $9,242. Add in room and board and books and residents pay $25,000 per year to attend. This figure is expected to more than double by the time toddlers reach college.

So even with the struggling stock market, LaSpisa and most advisers urge clients to utilize a 529 plan.

Morningstar Inc., an independent investment-research firm based in Chicago, recently released its annual review of 529 plans. It looked at fees, quality of the underlying funds, strength of the managers and the long-term track record. The Illinois Bright Start program was in its “top five” plans.

For parents not thrilled with the market mayhem, the College Illinois 529 plan allows you to lock in and pay for college at today’s prices.

College Illinois does not restrict students to schools in Illinois. However, the program does not cover the full tuition and fees at private colleges and at schools out of state, said Nancy Stephens, associate director for the program.

Parents have shown increased interest in the 11-year-old program. “Last year when the market was more volatile, sales went up 10 percent,” she said.

Parents are able to roll over money from one 529 plan to another once in a 12-month period. “I’ve seen an upswing in the number of calls from people asking how soon they can roll over money,” Stephens said.